If you were looking for a hint at where the top Democratic Presidential hopefuls stand on entrepreneurship--or even business more generally--you were likely disappointed after last week's debate. Save for a quick discussion on China and tariffs, the candidates were largely mum on their agenda for the nation's entrepreneurs--everyone except Andrew Yang, that is.
At the debate, the former tech executive who founded the New York City-based skills-training nonprofit, Venture for America, doubled down on one of his key campaign promises, to give every single U.S. citizen 18 or older $1,000 a month, no strings attached. Yang vowed to give away $120,000 to 10 families over a single year to highlight his version of Universal Basic Income, which he dubs the "Freedom Dividend."
Yang, and many others in the entrepreneurship sphere including Sam Altman, the chairman of the San Francisco-based startup accelerator Y Combinator, believe that offering working adults an unconditional sum of money can have benefits for society in general. It is seen by supporters as not only a potential salve against the robotics-driven employment displacement crisis many fear is coming, but also potentially a way for governments to foster entrepreneurship by creating a financial safety net.
While this particular brand of business incentive is buzzy and as savvy a political move as there ever was one, the results of UBI in practice will ultimately fail.
The Problems With UBI
One problem with UBI, as Yang proposes, is that it is not enough money to be an actual safety net. While that amount was chosen because it is enough to help, but not to disincentivize working, it is only enough to cover basic necessities for a tiny amount of Americans, as even just the median weekly income is $900 and most Americans save little. Thus, the vast majority of households will still struggle in covering basic necessities with UBI during an employment shock. Further, if a would-be entrepreneur cannot survive on $1,000 per month, this will not incentivize her to quit her job to start a business.
But there are problems with UBI even assuming it is enough money to create a safety net strong enough for a person to be willing to start up. Let's suppose more would-be entrepreneurs do start their companies as a result of UBI. If it sufficiently minimizes downside risk, it will similarly minimize downside risk going forward, keeping companies that should go out of business alive. Perhaps one of the reasons new businesses are disproportionately responsible for innovation and growth in the United States is precisely because of the severe consequences of failure. So while the UBI may increase the number of entrepreneurs, it may lead to less innovative companies, as entrepreneurs are less pushed to stay in business in the long run. This may lead to a society of much less competitive new companies, which in an increasingly global environment may present a threat to economic growth.
Furthermore, it is difficult to believe $1,000 a month can substitute for entrepreneurial passion. How many real entrepreneurs don't pursue their businesses because of lack of $1,000 a month? Entrepreneurship has always been driven by passion; people who want to live and breathe a solution to a problem because that's the only thing they can think of doing. One thousand dollars a month does not create nor compensate for this passion.
Then, Yang is proposing to fund the UBI with a Value Added Tax (VAT) on most goods sold. This means that for every buyer in the supply chain, there is an additional government tax. If you buy your inputs for $1 a 10 percent VAT means that input now costs $1.10. The problem is that essentially, a VAT acts just like a retail sales tax; the net economic burden of this tax is on the poorest consumers and the least financially-flush companies, as the prices of goods will naturally rise, at least to some extent. This will disproportionately affect small and new businesses with fewer resources to fund the increased costs of VAT, particularly those competing with larger corporations that experience much less financial pressure.
While Yang points to many cases where UBI has been successful, implementing UBI in one municipality or in a country such as Namibia or Finland, does not provide good insight into whether this would work as a federal-level policy in the United States. What works in Finland, or Namibia, cannot be copy and pasted into the United States and expected to work the same way. We have a more diverse population, and clearly different economic issues, then a small Nordic country, or a less diverse developing country. Therefore if it is implemented, it should be done on a much smaller scale to begin with.
A Better Idea
There are alternatives. We need more direct policy solutions to support our economic aims. We shouldn't address an employment crisis with UBI. We should address an employment crisis with employment (opportunities). If the assumption is that a UBI would draw more people into entrepreneurship, then consider other ways to achieve this. For instance, create short-term entrepreneurship funds that provide enough money to stop working for a short amount of time to start a company or entrepreneurship tax breaks that free up enough income to truly make a difference. This will get those risk-averse entrepreneurs to start companies, but not diminish the long-term incentives that drive entrepreneurship.
In the end, it's much easier to give people money than to actually create jobs. But giving people money is not a long-term solution for fostering (successful) entrepreneurship, nor can it combat an employment crisis. It is just a messy, large-scale policy designed to obfuscate actual problems. UBI is a cheap answer to an expensive question.
Sep 17, 2019